In a recent article, we saw how Intel (INTC) is well on its way to be a leading dividend growth stock, a status not many technology stocks are used to. This article goes further into dividend paying technology companies. Microsoft (MSFT) is another dividend paying tech stock which has the attention of the investors.
Let us take a look at some basic facts about Microsoft's dividends:
- The company has been paying dividends every year since 2003 and has been increasing the payouts each year.
- The last five years dividend increase averages 17%.
- The payout ratio sits at a comfortable 30%, giving it great room for further increases in the future.
As in the earlier exercises, let us look at the power of dividend growth for an investor who can set aside his/her money for 10 years in Microsoft.
- Assume you purchase 1,000 shares at the recent price level of $31 for a total initial investment of $31,000.
- The current yield works out to 2.6% as shown in the table below.
- Even though the average dividend increase has been about 17% so far, let us use a more conservative 10% for this calculation.
- Notice how the dividend payments and the yield on original cost almost triple in 10 years, leading to about $2000 in annual dividends for 1000 shares.
- We have left out the DRIP part from this piece as some investors choose to reinvest the dividends and some do not. Some DRIP during bad times to accumulate more shares and opt out of DRIP when the price per share seems to be at a fair value.
- Capital gains will almost certainly contribute to the overall returns as well. Like Intel, Microsoft has also been stuck in a trading range of $25 to $28 but the recent breakout augurs well for the future. The stock has seen heights not seen in a long time.
- However, in case the price dips, turning on the DRIP will be helpful in maximizing the returns when things turn around.
- Inflation has been ignored in this calculation as stocks are the best hedges against inflation when compared to other assets.
- One might think why not purchase a current yielder instead of waiting for Microsoft to grow into a high yielder in the future. Fair question. Unless a depression sets in, Microsoft is highly unlikely to reduce its dividend. The same cannot be said for junk high yielders.
- 10 years is a reasonable time period for this exercise as the market typically moves through many cyclical highs and lows in a decade.
Conclusion: Even though Microsoft has a lower current dividend yield than Intel and doesn't have as long a history of paying dividends as Intel, this exercise proves that Microsoft's greater dividend growth could eventually prove to be enough of a catalyst to at least match the returns from Intel, if not exceed.
However, a concern for investors could be that the company is not as thrifty as Intel in its money management and has also faced the wrath of investors for not unleashing bigger dividends, given its cash on hand. But it is a safe holding for people looking to diversify into dividend paying technology stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. May start accumulating Intel at $25 and Microsoft at $28 range.